Financial planning tips

September 06, 2016

Estate planning and charitable giving

By Krista Vermeer

Integrating charitable giving into your estate plan can help more than your community. It carries tax benefits too.

Charitable giving often reflects your age and stage in life. The latest available numbers from Statistics Canada show 84% of Canadians aged 15 and over – approximately 23.8 million people – donated at least once to charitable and nonprofit organizations in 2010. The average donor gave about $446 for the year, which adds up to $10.6 billion. The rates of giving are highest among those in the 35-to-54 age group.

Giving to charity isn’t just a smart strategy for community-building – it carries tax benefits, too. The Canadian tax system encourages gifts to charities by granting tax credits to individual donors. You get a 15% federal tax credit for the first $200 of eligible donations you make in a year. You can claim charitable gifts up to an annual limit of 75% of your net income – a number that rises to 100% for gifts made in the year of death and the year before.

“Charitable giving is top of mind in December, with holiday campaigns and the tax year-end approaching,” says Cindy Crean, Managing Director, Private Client at Sun Life Global Investments. “However, not everyone is aware of the full tax benefits associated with giving to charity.”

For example, the first-time donor’s super credit (introduced in 2013 and effective up to and including the 2017 tax year) provides an extra 25% non-refundable federal tax credit. This means a first-time donor can receive a total credit of 40% for the first $200 cash donated and 54% for the next $800.

Building charitable giving into your estate plan

Integrating charitable giving into your estate plan is another way to give back to the community. Planned giving can take the form of giving cash or donating shares, securities, mutual funds or life insurance. If you donate shares or other securities “in-kind” to charities, you get a tax break on the capital gains. Charities are accustomed to receiving gifts of securities and are well-equipped to handle these transactions.

“Many people aren’t aware of the benefits of charitable giving in their wills, unless they’re older and starting the estate planning process,” says David Freedman, counsel at Hull & Hull LLP in Toronto. “Giving to charity can be a great way to deal with assets, especially when you have valuable property, bonds or stocks. It can be more tax-efficient to donate these assets rather than cash.”

When it comes to capturing your charitable intentions in an estate plan, the experts have a few recommendations:

Consider giving stocks, bonds, mutual funds, segregated funds or life insurance. Many people default to cash when it comes to planning bequests, but it may be more efficient to give stocks, bonds or mutual funds in-kind to charity. Not only does this eliminate capital gains taxation, it also gives the estate a charitable donation receipt for the fair market value of the shares. This could produce significant tax savings for an estate, depending on the situation, while providing the same benefit for the charity.

Build in flexibility for your executor. Sometimes, charitable gifts of a certain dollar figure are planned years ahead of a person’s death and reflect the financial situation of that person at the time of planning. “Five or 10 years later, the financial picture may have changed and the estate may not have the liquidity to satisfy the gift,” says Freedman. “It’s important to have the liquidity built into the estate to fulfill specific charitable obligations.” Life insurance is one way to help ensure liquidity. It’s worth building flexibility into your will to allow an estate trustee to make decisions that help achieve a greater tax-efficiency, adds Freedman.

Revisit your estate plan on occasion. As with any good plan, regularly checking in is a good idea to capture any changes in personal circumstances or life events. “Seeking professional advice can help you build a personalized estate plan that matches your charitable intentions and optimizes the tax impact,” says Crean.

Whether you are motivated to give by pure generosity or a desire to reduce your tax bill, the benefit to the charities you support is the same. How you choose to give – and why – is up to you.

Charitable giving is just one aspect of managing your money. Professional advice about estate and financial planning can help you not only make the most of your retirement years, but also leave your estate in good shape.